Japanese Inflation Is Entirely Due To Higher Energy Prices

Japan's monthly consumer prices release Friday showed the highest inflation rate in over a year, suggesting that "Abenomics," the experimental stimulus program designed to reflate the Japanese economy after more than a decade of persistent consumer price deflation, may finally be kicking in.

However, it appears that the first positive inflation reading in 14 months was merely a function of high energy prices.

The headline consumer price inflation rate rose to 0.2% in June from -0.3% in May, exceeding estimates for a smaller advance to 0.1%. Stripping out food prices, the inflation rate was 0.4% – ahead of expectations for a rise to 0.3% from a flat reading in May.

However, when energy prices are also taken out of the calculation, the Japanese economy continued to grapple with deflation in June. Consumer prices excluding food and energy were down 0.2%.

"Electricity rates rose 9.8% YoY, accelerating from an 8.8% increase in May," say economists at Mitsubishi UFJ Morgan Stanley. "Gasoline prices rose 6.4%, the first YoY increase for three months, due to weaker year-earlier figures. There were marked price rises in the energy sector overall, with gas rates (manufactured and piped) up 4.7% and kerosene prices rising 6.2%."

The economists break down the data in a note to clients:

CPI still in negative territory when energy prices stripped out: The chances are that higher energy prices and the upward pressure on import prices from the weak yen will keep the CPI positive over the near term. That said, while US-style core CPI (which excludes energy prices and food (but not alcohol)), is now declining at a slower rate YoY, on a seasonally-adjusted MoM basis the index fell back into negative territory for the first time since February, dipping 0.1%.

This suggests to us that the recent upswing in the CPI is not due to price increases across the board. July data for metropolitan Tokyo, released one month earlier than nationwide indices, shows that the pace of decline in US-style CPI was unchanged from last month, falling 0.4% YoY, contrary to the nationwide trend towards milder decline. At its monetary policy meeting on July 10-11, the BoJ reaffirmed its average CPI growth forecasts of April (+1.4% in FY14, +1.9% in FY15, both excluding the effects of the consumption tax hikes), but meeting these targets will, in our view, be challenging.

In short, the latest consumer prices release in Japan is probably more indicative of high energy prices than the success of Abenomics at this stage.